California Real Estate and the Neurosurgeon


What does California real estate have to do with neurosurgery? If you are thinking about investing in California real estate, you need to have your head examined.

Before I start ranting, I would like to disclose that I have no political affiliation whatsoever.


March 2012, two Stanford professors (Boskin and Cogan) wrote an excellent op-ed in the Wall Street Street entitled "
California's Greek Tragedy". It is short, to the point, and well worth the few minutes to read it. The elections are over. California has made a commitment to exactly the reverse direction that the professors had hoped for.


Starting with Proposition 30, the sales tax increase and the income tax increase for the top 1%, the California version of the fiscal cliff has been averted for now, with $6 billion in estimated increases in revenue. Here is the
State Budget.  There is nothing but patchwork and political jargon in there, claiming among other things that


"……the Budget will be balanced in an ongoing manner. This represents the first time in over a decade that future spending is expected to stay within available revenues."

 

I have no reasons to believe that as we approach the end of the financial year next spring, California won't be running out of money once again.

As per Proposition 30:


"…..These new tax rates would affect about 1 percent of California PIT filers. (These taxpayers currently pay about 40 percent of state personal income taxes.)"

 

There are about 16.5 million tax returns for California according to the IRS, so 1% is only 165,000. I wonder if a few hundred of these 1%ers were to decide they have had enough and leave, taking whatever business they have with them, would it negate every extra dime in revenue that Proposition 30 was hoping to achieve? Furthermore, I wonder how many households with greater than $500k taxable income would choose to move to California?

After the elections, California not only has a Democrat as Governor, we have a super majority of Democrats in both the State Senate and Assembly. This is the unadulterated tax and spend party, supported strongly by the give-me-more unions. They have just raised the sales tax and income taxes for the rich, so where else can new revenue come from?

The answer: REAL ESTATE. Proposition 13 from the 1970's allowed Californians to cap the property tax. That is now an easy target, especially for commercial properties. 1031 Tax Deferred Exchanges would most likely be high on the list, especially for out of State exchanges. I don't wish to debate the merits of Proposition 13 here, but any repeal, or just talk of a repeal, will be detrimental to California real estate. While businesses that are not State dependent may procrastinate and many more may move out, new businesses certainly have no reason move in.

More unpredictable is the new round of rules and regulations that California is famous for. Pertaining to real estate, my biggest fear would be increased "tenant rights", rent control or other creative restrictions. What if I purchased a property with a reasonable vacancy allowance and the law changed, lengthening the eviction process. It would blow my profit/loss projections then and there. The same would apply to any businesses that are in the State today. Who in their right mind would think about relocating their business to California if one doesn't know what the legislature may be plotting? The direct impact to California real estate is through employment growth. No jobs, no housing.

Then there is the demographic squeeze. California has always had a much lower home ownership rate than the nation's average and it may go lower. First Tuesday, a California Real Estate Journal, recently published an article entitled "Will first-time homebuyers save California’s homeownership rate?"

First time buyers are not going to support California real estate for the indefinite future. Fat cats looking to retire in coastal California may question why they would want to move here and pay the extra taxes. Middle class retirees who can only afford the Inland Empire or Central Valley can find equally miserable locations to move to, such as Phoenix, only they're cheaper.

The consensus is quite contrary to my views. In Silicon Valley, real estate is on fire, fueled by Facebook, Apple and Google bucks.  Many markets are reporting growth in sales, median prices and a lack of inventory. I believe it is all noise and very temporary. To illustrate this, take a look at the most recent data for September, as reported by DQNews. DQ utilizes unmolested recorded data and is extremely accurate.

In Southern California, investors purchased 27.3% of all closings. 25.2% utilized FHA financing while 31.5% paid cash. Does that make sense? Why would anyone pay cash when the Fed Chairman is begging everyone to borrow at ridiculously low rates? (September was before QE3, but rates were not much different). For the Phoenix area (Maricopa-Pinal Counties), investors purchased 38.6% of the closings. 24.7% utilized FHA financing while 39.6% paid cash. For Las Vegas, a whopping 48.5% was purchased by investors. 35.2% utilized FHA financing while a mind-boggling 52.4% paid cash. I am using Phoenix and Vegas because they are typically overflows of investors from or in California.

This is nuts.  All these investors and cash buyers may be happy with a low yield today, as anything seems better than the miniscule return from other fixed rate instruments. Have they considered that they have an embedded loss? What if rates normalize or possibly go parabolic? Can you imagine what is going to happen to the less than 4% cap rate rental if the 10 year treasury note yield is 4%? (As recently as 2007, before the 'QE' exercises, the 10 year treasury yield was over 5%.)

In summary, California is entering a phase where demographics are most unfavorable. The political environment is even more business unfriendly than it was previously. Chairman Mao and Comrade Stalin showed the world that it is evil to be a landlord. California may be taking a chapter from their manifestos. Having enjoyed the fruits of California real estate ownership since 1975, I have never seen such uncertainty as we face today. Current prices, in my opinion, are not remotely low enough to offset the risk.

 


 

Get thee hence, evil landlord!

(Photo via Wikimedia Commons)

 


 
 

Emigrate While You Can... Learn More

 
 

 

Dear Readers! We are happy to report that we have reached our turn-of-the-year funding goal and want to extend a special thank you to all of you who have chipped in. We are very grateful for your support! As a general remark, according to usually well informed circles, exercising the donation button in between funding drives is definitely legal and highly appreciated as well.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

One Response to “California Real Estate and the Neurosurgeon”

  • Floyd:

    The future will tell who had the upper hand: those converting cash into RE, or those holding on to their cash waiting for better valuations.

    Given how much cash is despised, it may be the time to hold on to it…
    But, boy, this is frightening with all the ZIRP and QE around…

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • safe spaceReality is a Formidable Enemy
      Political Correctness Comedy We have recently come across a video that is simply too funny not be shared. It also happens to dovetail nicely with our friend Claudio's recent essay on political correctness and cultural Marxism. Since this is generally a rather depressing topic, we have concluded that having a good laugh at it might not be the worst idea.   How to most effectively create a “safe space” on campus Cartoon by Nate Beeler   It is especially funny (or...
  • Gold bars are displayed at a gold jewellery shop in the northern Indian city of Chandigarh May 8, 2012. Gold imports by India, the world's biggest buyer of bullion, could rise on pent-up demand from jewellers after the federal government decided to scrap an excise duty on jewellery it imposed in March, the head of a trade body said on Monday. REUTERS/Ajay Verma (INDIA - Tags: BUSINESS COMMODITIES)Fresh Mainstream Nonsense on Gold Demand
      They Will Never Get It... We and many others have made a valiant effort over the years to explain what actually moves the gold market (as examples see e.g. our  article “Misconceptions About Gold”, or Robert Blumen's excellent essay “Misunderstanding Gold Demand”).  Sometimes it is a bit frustrating when we realize it has probably all been for naught.   Gold wants to know what it has done now... Photo credit: Ajay Verma / Reuters   This was brought home to...
  • fir wateringDrowning the Fir
      Presidential Duties Our editor recently stumbled upon an image in one of the more obscure corners of the intertubes which we felt we had to share with our readers. It provides us with a nice metaphor for the meaningfulness of government activity. First, here is a look at the picture – just quietly contemplate it for while and let it work its magic on you:   Yes, these two gentlemen are actually watering a tree in the middle of a downpour... Photo via...
  • Hollande 2The Wonder Years Are Over
      Everybody Is Unhappy PARIS – “France?” We were in a cab on the way from Charles de Gaulle Airport yesterday. We had innocently asked our cab driver how things were going in the country. He had some thoughts...   French president Francois Hollande: against all odds, he managed to attain the most powerful position in French society. And yet, even he is unhappy. Photo credit: Patrick Kovarik / AFP   “France is a mess. We have 5 million people unemployed. And...
  • mossack fonsecaGold – The Commitments of Traders
      Commercial and Non-Commercial Market Participants The commitments of traders in gold futures are beginning to look a bit concerning these days – we will explain further below why this is so. Some readers may well be wondering why an explanation is even needed. Isn't it obvious? Superficially, it sure looks that way.     As the following chart of the net position of commercial hedgers illustrates, their position is currently at quite an extended...
  • 5-SPX vs. tax receipts from 2007Corporate Tax Receipts Reflect Economic Slowdown
      Tax Receipts vs. the Stock Market Following the US Treasury's update of April tax receipts, our friend Mac mailed us a few charts showing the trend in corporate tax payments. Not surprisingly, corporate tax payments and refunds mirror the many signs of a slowing economy that have recently emerged. An overview in chart form follows below. First up, corporate tax receipts in absolute figures.   Corporate tax receipts in absolute dollars and cents – this is quite astonishing...
  • swiss-cultureSwitzerland About to Vote on “Free Lunch” for Everyone
      Will the Swiss Guarantee CHF 75,000 for Every Family? In early June the Swiss will be called upon to make a historic decision. Switzerland is the first country worldwide to put the idea of an Unconditional Basic Income to a vote and the outcome of this referendum will set a strong precedent and establish a landmark in the evolution of this debate.   The Swiss Basic Income Initiative in a demonstration in front of parliament. As we have previously reported (see “Swiss...
  • picture-social-contract-not-foundHeretical Thoughts and Doing the Unthinkable
      Heresy! NORMANDY, France – The Dow rose 222 points on Tuesday – or just over 1%. But we agree with hedge-fund manager Stanley Druckenmiller: This is not a good time to be a U.S. stock market bull.   Legendary former hedge fund manager Stanley Druckenmiller at the Ira Sohn conference – not an optimist at present, to put it mildly. Photo credit: David A. Grogan / CNBC   Speaking at an investment conference in New York last week, George Soros’ former partner...
  • ClintotrumpStaying Home on Election Day
      Pretenses and Conceits The markets are eerily quiet… like an angry man with something on his mind and a shotgun in his hand. We will leave them to brood… and return to the spectacle of the U.S. presidential primaries. On display are all the pretenses, conceits, and absurdities of modern government. And now, the race narrows to the two most widely distrusted and loathed candidates.   US election circus: Deep State Rep vs. Rage Channeller   The first, a loose...
  • Jackboot 2How the Deep State’s Cronies Steal From You
      Expanding in Ireland DUNMORE EAST, Ireland – We came down the coast from Dublin to check on our new office building. For this visit, we wanted to stay somewhere different than we normally do. So we chose a small hotel on the coast, called the Strand Inn.   Irish landscape with alien landing pads. Even the guys from Rigel II have heard about Ireland's corporate tax rate. Photo credit: Tourism Ireland   It is an excellent place for seafood and soda bread on a...
  • time100-grid-covers-whiteThe World's 100 Most Influential Hacks, Yahoos and Monkey Shiners
      Hacks and Has-Beens NORMANDY, France – What has happened to TIME magazine? Henry Luce, who started TIME – the first weekly news magazine in the U.S. – would be appalled to see what it has become.   Time cover featuring the sunburned mummy heading the globalist IMF bureaucracy (which inter alia advocates that governments should confiscate a portion of the wealth of their citizens overnight, even while its own employees don't have to pay a single cent in taxes). Once you...
  • YenThe Japanese Popsicle Affair
      Policy-Induced Contrition in Japan As we keep saying, there really is no point in trying to make people richer by making them poorer – which is what Shinzo Abe and Haruhiko Kuroda have been trying to do for the past several years. Not surprisingly, they have so to speak only succeeded in achieving the second part of the equation: they have certainly managed to impoverish their fellow Japanese citizens.   Shinzo Abe and Haruhiko Kuroda, professional yen assassins Photo credit:...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com